MergerMarket
* Bid consortium reportedly keen on Sainsbury’s before it made HRG offer
* UK Takeover Code leaves little room for bidder to walk away
* Hard for investors to force board to invoke material change condition - lawyers
The UK Takeover Code leaves little room for J Sainsbury [LON:SBRY] shareholders to force the company to drop its bid for Home Retail Group [LON:HOME], in the face of reported takeover interest in the grocer, independent lawyers said.
Investors would have to rely on conventional means for bidders being allowed to lapse UK deals. If the HRG bid does fall through, Sainsbury’s would be a ripe target due to damaged management reputations, one of the lawyers said.
Qatar Investment Authority (QIA), a 25.1% Sainsbury’s shareholder, was reported last week to have begun working on a bid for the UK grocer in autumn 2015 with CVC Capital Partners and Brookfield. The consortium was reportedly deterred by Sainsbury’s bid for HRG earlier this year.
The QIA report came after Sainsbury’s won a month-long bidding war for HRG. Sainsbury’s share price rose steadily through the process, trading Friday at 293p. It had traded below 235p in December and January. The QIA consortium was reported to have viewed Sainsbury’s as undervalued when assessing the bid.
A spokesperson for QIA declined to comment on the report and QIA’s future plans for its Sainsbury’s stake. Respective spokespeople for J Sainsbury and Home Retail Group declined to comment on the situation.
UK takeover rules are stringent in terms of allowing a limited number of reasons bidders can cite to walk away from formal offers to UK targets. These include if the UK Competition and Markets Authority or European Commission passes a merger review into Phase II, and if certain conditions regarding there being no material adverse changes or no adverse circumstances are not met.
A bidder can also walk if a vote by its own shareholders allowed under the Takeover Code does not meet the minimum acceptance level. The HRG deal does not qualify as a Class 1 transaction, as the offer value was less than 25% of Sainsbury’s market cap when it issued its formal offer under Rule 2.7 of the Code on 18 March, several lawyers noted.
Shareholders have the ability to convene Extraordinary General Meetings themselves if called for by an investor or group of investors representing more than 5% of a UK plc’s share capital. In theory, there is potential for an investor to do this and propose a resolution that Sainsbury’s abandon the bid or to remove the company’s board, two lawyers said.
It would take a brave board to press on with an acquisition without at least considering whether widespread shareholder unrest could be cited as a material adverse change, one of the lawyers said. However, this could fall short of the Panel’s strict materiality threshold, he added.
WPP Group’s [LON:WPP] 2001 attempt to back out of its bid for Tempus Group, citing the 11 September 2001 terrorist attacks as a material adverse change, was rejected by the Panel, two of the lawyers noted.
In its ruling on the Tempus acquisition, cited in a 2013 paper, the Takeover Panel stipulated that a material adverse change must demonstrate “very considerable significance striking at the heart of the purpose of the transaction in question, analogous ... to something that would justify frustration of a legal contract.”
A bidder could also fail to meet certain other conditions set out in an offer document, said the first lawyer. However, if the panel determines this is in bad faith, for example if it was done at the behest of investors, it would rule against the bidder being allowed to lapse an offer this way, said one lawyer.